Business Insights

Why for some companies, the economic downturn is business as usual?

This is the title of an article published by the Wall Street Journal on March 23, 2009, which is full of useful information even for us, small business owners or managers. I’m saying this because the article is obviously directed towards big companies. But I liked the ideas and I tweaked the content a bit to make it more suitable for businesses like ours, that is small.

The answer to the question in the title can be summed up in three words: Rethink your strategy. One should look at the places where volatility is business as usual: emerging markets. Here companies have learned that in bad times it is not enough to try staying alive by slashing their costs and waiting for the rebound: they have to go on the offensive. In Eastern Europe, South Africa and Latin America , managers use the chaotic times of an economic downturn to implement new strategies, new creative ideas and boost their business. In every crisis there are great opportunities, this is what Chinese always knew, as the two ideograms for the word “Wei-Ji” (crisis in Mandarin Chinese) mean danger and opportunity. I really believe that we are entering in a world of opportunities. Here are few ideas from companies in those markets, about what we can do if we want to do well in this global recession.

Rethink your pricing strategy

A rule which is always true is that the margin that one adds to the cost of goods should not be the same across the board, for all products. One can even sell below cost for the few products which are facing strong competition, in this way attracting new customers to buy from you; and adding a greater margin on the products or services which are unique to your company. But now we can stretch our creativity and induce our existing clients to buy more expensive products from us, by hiding the price increase with special offers, or packing less number of products in the same offer. In this way we might lose some profit margin, but we keep customers loyal to the brand and even have them upgrade to a more expensive product.

Rethink your marketing strategy

In this downturn, companies all over the world have already cut their marketing budget. What should we do with the small resources which are left? Companies In Latin America are focusing all their resources in an unwavering effort to retain existing customers, which is much less costly than getting new ones. Within this strategy, instead of using expensive advertising (TV, radio or printed media), they focus in making their products more visible and available to customers who already know them. This involves special promotions through direct mail or email, or in-store display and advertisements. But it is also a special effort in customer service, which should be so much better in these times than when the market is up. When is the last time that you did a customer survey, if you ever did one? This is a mandatory tool if you want to know what level of service your clients expect, and you should exceed that.

Rethink your business model

In some cases rethinking pricing and marketing strategies may not be enough. In this continuing economic downturn it could happen that customers simply can’t afford some of our products or services anymore. In this case we have to change our business model to match the new reality. Also this process may start with a customer survey, to understand which characteristics our product should carry and at which price. Followed with a competitive intelligence research, to see what our competitors are doing. On the basis of this, let’s recreate our business model, starting from the value proposition, then continuing with the distribution and communication strategy, the pricing strategy, the cost structure and the revenue stream. Will it work now? Is what we give to our clients what they really need and are willing to pay for? After doing our homework as explained here the answer is most probably yes.

Test, test, test

So far we have looked at the strategies that companies can implement. During implementation it is fundamental to monitor or track how the business is doing with the new strategies. In other words we have to test whatever we implement to see if it’s working as we planned. How do we do this? Obviously we need to have a plan, a business plan. This is different from the business model, it is much more practical and detailed. It contains what exactly everybody involved should do and when. And what is the impact of this on the business numbers, the profit and loss, the cash flow and the balance sheet. Then we can compare the actual numbers with the projected numbers of the business plan. If there is a considerable difference, we should ask ourselves why. Is this a sign that the new strategy doesn’t work? Or is it something that can be fixed?

And of course we should repeat the customer survey to understand if and in which measure our clients are receptive of our new strategies. Once an extremely successful Italian businessman, who transformed his father artisan shoe fabrication company into a global multi-billion affair, told me that being an entrepreneur demands doing continuous surgical operation without anesthetics. I think what he meant is that we can’t be attached to a business model on the basis that we have been doing this for long time and there is no reason to change. If you are a business owner, change is part of your daily life. And often this process can be painful, but it’s inevitable. On the other hand, remember what we said at the beginning of this blog: these turbulent financial times can be a tremendous opportunity to strengthen our competitive position and our financial performance.